ADP Test Failure

[Guest Buzzman]

If 401(k) plan fails ADP test due to excess HCE contributions and SBJPA distribution amount plus allocable income is distributed to the HCE's, is the plan deemed to have passed the ADP test and be in compliance or will it need to use a correction method under SCP pursuant to EPCRS to be compliance?

[Laura Harrington]

Was the corrective distribution made within 12 months following the close of the plan year?

[Lou S.]

If 401(k) plan fails ADP test due to excess HCE contributions and SBJPA distribution amount plus allocable income is distributed to the HCE's, is the plan deemed to have passed the ADP test and be in compliance or will it need to use a correction method under SCP pursuant to EPCRS to be compliance?

I'm a bit confused by your question.

The plan fails the test but there is no compliance violation if the refunds are made timely.

As Luara points out as long as the refunds are made within 12 months of the close of the plan year you don't need to worry about any of the correction programs. In most cases if the refunds are made after 2.5 months after the end of the plan year but before 12 months after the close of the plan year, the employer will need to pay an excise tax.

[Guest Buzzman]

Was the corrective distribution made within 12 months following the close of the plan year?

Thanks Laura - the plan year closed 12/31/06 and distributions were made January 2008, so not within 12 months

[Laura Harrington]

That's unfortunate.

Then yes, in order to be in compliance the plan should correct the ADP failure using one of the methods under the EPCRS program: one-to-one correction method or QNEC method.

Have a great day.

[Guest Buzzman]

That's unfortunate.

Then yes, in order to be in compliance the plan should correct the ADP failure using one of the methods under the EPCRS program: one-to-one correction method or QNEC method.

Have a great day.

Thanks Laura!

[BG5150]

If it's within 2 years, can't you just self-correct using the guidelines set forth in EPCRS?

[Laura Harrington]

If it's within 2 years, can't you just self-correct using the guidelines set forth in EPCRS?

Yes, that is what he is wanting to do.

There are two methods of correction stated in EPCRS: the one-to-one correction method and the QNEC correction method.

[BG5150]

If it's within 2 years, can't you just self-correct using the guidelines set forth in EPCRS?

Yes, that is what he is wanting to do.

There are two methods of correction stated in EPCRS: the one-to-one correction method and the QNEC correction method.

Since the plan year in question is 2006, I don't think a QNEC is possible; just to do the refunds and do the 1-1.

[Guest Sieve]

A QNEC is not possible under the 12-month rule (i.e., cannot consider a QNEC in the ADP if contributed more than 12 months after the end of the year to which it relates), but it is a permissible correction method under self-correction EPCRS (through the end of 2009--2 years after the statutory correction period, in the case of a 2006 ADP test).

[fiona1]

A QNEC is not possible under the 12-month rule (i.e., cannot consider a QNEC in the ADP if contributed more than 12 months after the end of the year to which it relates), but it is a permissible correction method under self-correction EPCRS (through the end of 2009--2 years after the statutory correction period, in the case of a 2006 ADP test).

Unless the failure is deemed to be insignificant - then the 2 year deadline would not apply.

[Guest Sieve]

Correct, fiona1, but I don't know that I'd consider an ADP failure to be insignificant.